REC Limited's (NSE:RECLTD) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

REC Limited (NSE:RECLTD) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 291% in the last year.

Although its price has surged higher, REC may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.1x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 68x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, REC has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for REC

Want the full picture on analyst estimates for the company? Then our free report on REC will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as REC's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Pleasingly, EPS has also lifted 68% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the six analysts following the company. With the market predicted to deliver 22% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that REC's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From REC's P/E?

Even after such a strong price move, REC's P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that REC maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for REC you should be aware of, and 2 of them don't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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